Entrepreneurs' Relief
134. The view of the entrepreneurs' relief which
was expressed to us by Oxford University was quite different from
that of any of our other witnesses. In their opinion the case
for the relief was unclear. They pointed out that the document
"Enterprise: unlocking the UK's talent" (to which we
refer further in Chapter 5 below) listed five strategies to develop
enterprise in the UK. None of these strategies included entrepreneurs'
relief or any other tax measure. They concluded[41]
"Further, an entrepreneur that has already gained the benefit
of the relief has a (comparatively) reduced incentive to undertake
a new enterprise. This may be thought to balance the need of fairness
in the tax system with the need to create incentives to invest.
But the basic relief itself, which allows £1 million of gains
for a single individual to be tax free, in any case raise questions
of fairness."
135. Our other witnesses from the private sector
took a relief for business assets as their starting point. But
they told us that the entrepreneurs' relief was based on the former
retirement relief which had been repealed in 1998 rather than
on the business assets tapering provisions which replaced it.
The latter, they said, would have been more familiar to HMRC staff
and practitioners alike, would have been simpler, more comprehensive,
and would have avoided many of the very considerable problems
associated with retirement relief, for example the "whole
or part of the business test" which was previously a problem
for unincorporated businesses.
136. As Edward Reed (LSEW) said, "Retirement
relief was a relief which had mainly critics and very few supporters
… There are specific problems with it which have not been
addressed ... It does seem slightly peculiar to take a relief
which very few people found easy to administer or understand and
try to replicate it all these years later when we thought it was
consigned to the dustbin" (Q 221). On the other hand,
as Francesca Lagerberg (ICAEW) said "I think [entrepreneurs'
relief] has missed some opportunities, but the policy around it
was meant to be quite restrictive and it has probably done what
it said on the tin. I think we would have liked it to have done
more but that is a policy decision" (Q 113).
137. A particular concern amongst our private
sector witnesses related to the exclusion of many employee shareholdings
from the scope of the relief. The relief takes as its test that
the individual officer or employee must be selling shares in his
personal company, i.e. that he must have a shareholding of at
least 5% in the company in order to qualify for the relief: Simon
Walker (BVCA) was concerned that there might be cases where there
were people working together in a company where one would qualify
and another would not. He said "You actually have more perverse
incentives where the person at the top is actually doing relatively
well compared to his or her colleagues" (Q 291).
138. There were more detailed areas of concern
to those witnesses involving circumstances which had been covered
by the business taper relief but are currently excluded under
the Finance Bill as published. These relate to trustees doing
business and to the structure of the business organisation, in
particular since limited liability partnerships are more widely
used than they were in the days when retirement relief was on
the statute book. There were concerns also about assets held outside
a business.
139. These matters were discussed in the Public
Bill Committee[42]. We
note that there was one specific concern relating to the restriction
on the relief where rent has been paid for the use of an asset.
The Financial Secretary to the Treasury promised to consider this
point before the Report stage of the Finance Bill in the House
of Commons. That apart however she resisted the various amendments
which were discussed and gave little sign of any further consideration.
140. David Richardson (HMRC) explained that entrepreneurs'
relief was a new relief, not a disguised form of taper relief.
The objective was to ensure that entrepreneurs selling their businesses
should receive relief: business assets taper relief went much
wider. Because retirement relief had the same objective, that
was a reasonable place to start, but some of the complexities
of retirement relief—such as the age and ill-health provisions
and the qualifying periods—had been stripped out. He said
"It seemed a sensible place to start rather than inventing
something new, which is always dangerous and risky, but we have
taken out some of the provisions that used to cause problems"
(Q 335).
141. David Richardson (HMRC) went on to explain
that as for employee shareholdings, the purpose of the relief
was to relieve entrepreneurs not any shareholder or employee.
Where to draw the line in determining the appropriate percentage
was a matter for Ministers, but 5% had been in the retirement
relief. Moreover the average gain with all-employee schemes was
well below the CGT annual exempt amount (Q 336).
142. As for the different treatment of companies,
partnerships including limited partnerships, and sole traders,
David Richardson (HMRC) said "The basic principle behind
the relief for all of those different situations is exactly the
same, which is that the individual needs to be disposing of a
share of their interest in the business … The fundamental
point is the same but obviously [the relief] operates in a slightly
different way, depending on the particular legal and organisational
structure" (Q 338).
143. In their supplementary written evidence[43],
HMT made it clear, following the oral discussion at Q 340-342,
that a director or employee who had a shareholding of 5% or more
and retired from the company before selling his shares would qualify
for the entrepreneurs' relief only if, on or before he retired,
the company had ceased trading or had ceased to be the holding
company of a trading group and all the other conditions were satisfied.
This would mean, for example, that in most circumstances someone
who was unable to find a purchaser for his shares when he wished
to retire would either have to stay with the company for longer
than he wished, or would not qualify for the relief when finally
he was able to sell. This issue may be particularly acute where
there is a requirement that a director has to be a shareholder.
144. Not dissimilar circumstances involving a
withdrawal from a business in stages were discussed in the debate
in the Commons Public Bill Committee[44]
to which we referred earlier. Mr Philip Hammond, speaking
for the Opposition, said[45]
"It is also likely that [an individual] may cease to be an
employee or officer of the company before finally disposing of
his shareholding. The tax regime in the Bill will drive structures
for exits from businesses and that is undesirable. We think that
the tax regime should not drive behaviour that otherwise would
optimise the smooth transition of a business from one ownership
to another". The Financial Secretary to the Treasury promised[46]
to keep some of the points made in the debate under review, but
was concerned not to lose the focus of the relief on entrepreneurs
withdrawing from the business.
145. We note and understand, both from the
debate in the Commons Public Bill Committee and from what officials
told us, that the policy of the Government is to focus the relief
on entrepreneurs. Nonetheless, within that, we think that there
is a strong case for widening the relief, by way of amendments
to the Finance Bill at its Report Stage in the Commons, to include
the particular areas brought to our attention:
- employee shareholdings;
- trustees doing business;
- assets held outside a business;
- withdrawal from a business in stages, particularly
retirement as a director before a sale of shares.
There is also a good case for aligning the treatment
of disposals of interests in businesses whatever the form of business
structure.
146. We accept that any widening of the relief
would require a measure of further complexity, but, given that
we cannot now go back to a provision closer to the business assets
taper relief which would have been simpler in both structure and
operation, this is a price that may have to be paid.
Serial entrepreneurs and the
lifetime limit
147. The lifetime limit of £1 million on
the extent of the entrepreneurs' relief will cover a very large
proportion of cases, and, as noted in paragraph 83 above, when
announcing the relief the Chancellor of the Exchequer said that
it would be kept under review. But our private sector witnesses
were concerned that that assurance might very well not sufficiently
satisfy serial entrepreneurs who bring considerable value to the
economy.
148. Simon Walker (BVCA) said, "I do not
think [the limit] will stop a serious serial entrepreneur, but
I think it is a disincentive" (Q 291). Richard Baron
(IoD) suggested that the limit might do for a start, but he added,
"One can easily see it running out, and of course it is the
successful [serial entrepreneurs] we want to encourage" (Q 179).
He suggested that checks should be made on the use of the relief
and that the limit should be looked at again in, say, five years'
time.
149. The ICAEW believed that the limit should
be indexed in line with inflation and would benefit from alignment
with the pensions lifetime limit. Frank Haskew (ICAEW) admitted
that the two issues were separate, but added "I think it
was a question of if you want simplification potentially they
were both in the same sort of area, both, if you like, increasing
every year, so it was a question of having one limit" (Q 108).
150. Michael Snyder (City of London) was concerned
more generally about the message being sent to serial entrepreneurs.
He said "In terms of the changes in the CGT and entrepreneurs'
relief and the way that gain happens, I will just say it neutrally.
Perhaps it was not the most helpful in encouraging people to be
serial entrepreneurs. The process of taking retirement relief
away, then introducing the ten per cent, then taking away the
ten per cent and then having to introduce the £1 million
limit was not a particularly helpful way of giving out a message
again from government and the Revenue saying, 'We really wish
to encourage this area'" (Q 166). He suggested that
there might be a revolving limit on the relief, i.e. every five
years it might be reinstated to a zero clock.
151. David Richardson (HMRC) said that the relief
"does recognise the concept of serial entrepreneurs and that
was certainly the intention of the design" (Q 343).
However the setting of the level was a matter for Ministerial
judgement. The figure of £1 million was not an insignificant
amount and, even if that level were exceeded, the gains would
be taxed at 18% which was historically a very low figure for capital
gains tax (Q 343).
152. When the limit was discussed in the Public
Bill Committee[47], the
Financial Secretary to the Treasury was unwilling to accept a
formal commitment to review. Nonetheless she assured the Public
Bill Committee that it would be kept under active review as part
of the normal process of considering policy in the pre-Budget
programme of work.
153. We recognise that the Government has
said that it will keep under review the size of the limit to the
entrepreneurs' relief and we have seen the assurances which the
Financial Secretary to the Treasury gave to the Public Bill Committee.
Nonetheless, given the shocks to which these changes to capital
gains tax and other events have given rise, we are concerned whether
an assurance is in practice sufficient to provide the certainty
which entrepreneurs need to see in the tax system.
154. Accordingly we recommend that there should
be a means of ensuring that the limit keeps pace with events,
for example, though not necessarily, through indexation.
26 Hansard, 9 October 2007, cols 170-171. Back
27
PBRN 17, paragraph 9. Back
28
PBRN 17, paragraphs 10, 11 and 13. Back
29
Hansard, 24 January 2008, cols. 1627-1628. Back
30
Hansard, 24 January 2008, col.1628. Back
31
2007 Pre-Budget Report and Comprehensive Spending Review, para
5.79. Back
32
Memorandum of Evidence by the ATT (Volume II, p 11). Back
33
Memorandum of Evidence by the BVCA (Volume II, p 132) Back
34
Memorandum of Evidence by the IoD (Volume II, p 91). Back
35
Memorandum of Evidence by Oxford University (Volume II p 123).
Back
36
Public Bill Committee Hansard 8 May 2008 cols 77-88. Back
37
Memorandum of Evidence by Oxford University (Volume II, p 124). Back
38
Memorandum of Evidence by Oxford University (Volume II, p 124) Back
39
Memorandum of Evidence by ATT (Volume II, p 11). Back
40
Memorandum of Evidence by the ICAEW (Volume II p 37). Back
41
Memorandum of Evidence by Oxford University (Volume II, p 124). Back
42
Public Bill Committee Hansard 8 and 13 May 2008, cols 120-157. Back
43
Memorandum of Supplementary Evidence by HM Treasury (Volume II,
p 161) Back
44
Public Bill Committee Hansard 8 May 2008 cols 120-130. Back
45
Ibid at col 124. Back
46
Ibid at cols 126-130. Back
47
Public Bill Committee Hansard 8 May 2008, cols106-118. Back
